Kashkari: AI Boosting Neutral Rate

• The Federal Reserve's neutral rate (also called the natural rate of interest) represents the inflation-adjusted interest rate that neither stimulates nor restricts economic activity[4] • Current Fed policy rate of 3.5%-3.75% is viewed by some within the Fed as at or near the neutral level, while others believe it may be restrictive[4] • Bankrate's 2026 Interest Rate Forecast projects three more rate cuts totaling 0.75 percentage points in 2026[3] • The Fed's new voting members for 2026 include four neutral voters, six dovish voters, and two hawkish policymakers according to Wells Fargo analysis[3] • AI investment capacity considerations: Technology firms currently maintain low debt loads relative to their size, suggesting balance sheet capacity for increased debt issuance to finance AI infrastructure[6]

If AI investments are indeed raising the neutral rate as Kashkari suggests, this could justify maintaining higher interest rates for longer, potentially constraining rate cuts in 2026. This creates tension between supporting employment and controlling inflation. The Fed faces competing pressures: dovish members see a path for lower rates toward year-end 2026, while hawkish members remain concerned about inflation persistence. Higher neutral rates driven by productivity gains from AI could reshape the Fed's inflation-fighting strategy and long-term monetary policy framework.